First District Court Panel Rejects California Department of Insurance’s Argument of Probable Interference Due to Creditor’s Lawsuit against CastlePoint Group
On June 15, 2021, a panel of the First District Court reversed a decision of the San Francisco County Superior Court, and thereby rejected the arguments made by the California Department of Insurance that allowing the creditors’ lawsuit to proceed would interfere with liquidation proceedings. The First District Court Panel held that an injunction barring legal claims against the CastlePoint estate (debtor) which was applied when the insurance commissioner liquidated the company, would not block six out of ten causes of actions as listed in the lawsuit. In re Castlepoint National Insurance Company in Liquidation, A158646 (filed Jun 15, 2021). The Panel judges wrote in the ruling that they are “not persuaded that allowing these claims to proceed in New York will deplete the assets of the CastlePoint estate or disrupt the liquidation plan.”
The debtor, CastlePoint was incorporated as Tower Group International Ltd., a Bermuda-based group of ten insurance companies. The Tower Group borrowed $175 million from Alesco Preferred Funding and other investors by selling trust preferred securities, called TruPS. However, in the year 2013, the stock price of Tower Group declined sharply and therefore, its shareholders sold the company for $143 million to a reinsurer owned by the Karfunkel Family Trust, known as ACP. Soon after, the Karfunkels sold out majority of Tower’s assets to AmTrust and National General Holdings Corp. The financial condition of Tower Group continues to deteriorate. In the year 2016, the company entered into an agreement with regulators in six states to merge all the Tower companies into CastlePoint and execute a conservation plan. Thereafter, the California Insurance Department was appointed as a conservator. It later liquidated the company and initiated the process of selling off its assets to pay unresolved claims.
In 2017, plaintiffs filed a lawsuit in Manhattan, against the Karfunkel family, AmTrust and other defendants. The lawsuit accused the defendants of conspiring to loot the Tower Group by selling off its most valuable assets while leaving the carrier’s poor performing book of business to be conserved as CastlePoint. The suit said the defunct company owed $220 million on the TruPS securities including interest. It sought to recover that money from the Karfunkels, AmTrust and National General, whom the plaintiffs accused of fraud and unjust enrichment.
It is pertinent to note that in 2016, after Insurance Commissioner Dave Jones was appointed as a conservator of CastlePoint in 2016, he agreed to accept a contribution of $200 million from the AmTrust, National General and the Karfunkel Trust for clearing pending claims. The conservation agreement further enjoined the insurance carrier’s creditors for initiating or pursuing claims against the Karfunkel Trust, ACP, AmTrust and Tower without the approval from insurance department. Thereafter, Jones released those parties from any claim the insurance department may have regarding their involvement with CastlePoint. Thus, when the creditors sought permission to go ahead with their lawsuit, Dave Jones contested that doing so would not be equitable as “it would deny the defendants the benefit of their bargain…purchased at a cost of over $200 million”. The Panel found the argument to be “remarkable” and found that some of the claims of the creditors would potentially interfere with the liquidation process as the claims that sought compensation for action that took place as a part of conservation and liquidation process was evidently barred by the injunction. However, the panel allowed the creditors to proceed with other causes of action that are not related to the conservation and liquidation, such as breach of contract, breach of fiduciary duty and tortious interference, against the Karfunkel family, Tower and ACP.
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